Even if you don’t follow financial news too closely, I’m sure that most of you have kept up on the rise (and recently slight fall) of our Canadian dollar. Some premiers and business leaders have called on the government to take steps to lower the dollar. While their remarks may have been good for the news cycle, they portray a faulty image of how the value of our dollar is set.

The Canadian dollar is traded on what is known as a floating exchange rate. The easiest way to think of the exchange is a big auction where everyone is bidding to buy Canadian dollars. Some people are bidding on Canadian dollars to buy Canadian goods, some are bidding on Canadian investments, and some are bidding just because they think the bidding will go higher later.

When politicians call for policies that will bring down the dollar they are essentially calling for people to buy less Canadian goods because ultimately people use Canadian dollars to buy Canadian goods. They are encouraging interference in the bidding at the auction, where ultimately we want Canadian goods to sell for as much as possible. (The speculation is somewhat different and is usually short term.)

The dollar will rise and the dollar will fall. Some industries will unfortunately be hurt and some will be helped by the change in the rate. But the Bank of Canada’s monetary policy must be directed to keep inflation low and our money sound. If we, as politicians, interfere with the Bank of Canada, we could make the Canadian dollar look like the currency of a Third World banana republic.